China is cracking down on leveraged bets in its stock market, telling investors it won’t tolerate bubbles.
Margin requirements will be raised to 100 percent from 50 percent starting on Nov. 23 to discourage borrowing to finance stock purchases.
The rule change means investors with 1 million yuan (US$156,895) in their account are limited to borrowing another 1 million yuan from a broker to buy more shares.
Previously, they could borrow as much as 2 million yuan.
US-listed Chinese companies and exchange-traded funds tracking mainland shares slumped on concern the curbs will hurt investor confidence in the world’s second largest stock market.
But Hermes Investment Management Ltd. and Union Bancaire Privee say limiting speculative activity now will provide a stronger foundation for the nation’s equities to extend a bull market rebound, according to Bloomberg.
“This is a very responsible step on the part of the authorities to nip the growing bubble in the bud,” said Gary Greenberg, who helps oversee about US$1.8 billion as head of emerging-market equities at Hermes Investment Management in London.
“In the very short term it might have a negative effect, but long term it increases the robustness of the Chinese market.”
The Shanghai bourse said the restrictions will help prevent systemic risks from building in China’s financial system.
Margin financing, which shrank by more than half during the rout, rose for the past six weeks as the Shanghai Composite Index rallied more than 20 percent from its August low.
Surging margin debt helped amplify the record-breaking boom — and subsequent bust — in Chinese stocks earlier this year as easy access to leverage gave the country’s millions of individual investors increased buying power.
“The Chinese acted preemptively to stop the rally from being uncontrolled,” Koon Chow, senior macro and currency strategist at Union Bancaire Privee in London, said by e-mail on Friday.
“I think the move happened at a very good time — before speculative and margin-fueled trading drove the equity market higher again.”
Margin debt and volume rose “rapidly” in recent weeks as some investors bought shares trading at high valuations, the Shanghai exchange said in a post on its Weibo account explaining the rule change.
The move will help reduce leverage and ensure “healthy development” of the market, it said.
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